Dollar Surges, Bonds Fall on Data

U.S. 10-year Treasury bond prices moved lower
today, after two positive reports were released that pointed to U.S. economic
strength and growth. Mortgage applications rose last week unexpectedly,
and the U.S. trade deficit dropped slightly during the month of the November.
These reports, combined with vigilant comments from Fed President Moskow, led to
weakness in the bond market on U.S. economic strength. Bond prices usually
rise on weakness and fall on strength, which is exactly what happened today.
Traders bet that the Fed would not cut rates in Q1 of 2007; weakness in the
second half of 2006 created widespread sentiment that the Fed would be forced to
cut rates by March to deal with slowing growth and moderating inflation.
Bond prices initially shot higher in late June when the Fed initiated a
rate-pause on U.S. weakness, but recent reports are boosting widespread investor

The dollar pushed to a 3-month high against the
yen, and continued to move higher against the euro today. Positive
economic reports from the U.S. boosted the dollar on the international market.
The global currency market has been dominated by currencies backed by hot,
inflationary economies. Europe has been able to consistently produce
positive growth-oriented reports, which has helped the euro climb to record
highs against the yen, and yearly highs against the dollar. The yen’s
weakness can be traced to a string of weak reports from Japan during the second
half of 2006, while the dollar is struggling to turn itself around on recent
positive U.S. reports.

Crude oil fell 3% to close below $54 today, an
18-month low. The slide was spurred on by the Energy Department’s
inventory numbers, which showed a growing U.S. supply of fuel stockpiles.
Oil has been falling steadily on warm weather across the U.S. and high levels of
reserve supplies. OPEC has called for output reductions of nearly 2
million barrels a day, and has threatened further cuts if prices do not
stabilize. Natural gas rose 1.6% on forecasts that cold weather will soon
hit the Northern U.S.

Gold fell fractionally today, as the dollar moved
higher on the international market. Gold usually moves inversely to the
dollar and with oil, and it was dollar action that dominated today’s gold
trading. Traders turn to gold as a safe-haven from dollar weakness; dollar
strength led to gold selling today, as investors looked to the dollar for
returns. Yesterday gold did not act normally, as the metal fell with oil;
traders turned to the metal as a refuge from plummeting energy costs.
Copper prices rose over 4% today, as investors speculated that a rock slide in
Chile could severely effect global supplies of the metal, which is commonly used
in home and industrial building.

Wheat futures fell fractionally, while soybeans
gained fractionally today. Both futures contracts seemed to rest and
consolidate after plummeting from recent highs. Corn futures bounced over
1% after facing a similar slide.

Economic News

The U.S. trade deficit fell unexpectedly by 1% in

Wholesale inventories rose 1.3%, the fastest rate
in 3 months.

John Lee

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